Can companies win by investing in emerging markets?

The growth of Indian company Carzonrent is just one example of the burgeoning middle class in populous India.

Story highlights

Skeptics say Western companies don't have much to gain in emerging markets

Nathan Eagle says dollars invested in these markets are a smart move

He says the global middle class is expanding rapidly, consuming much more

Eagle: More products will be aimed at emerging markets first

Over the past year, there has been quite a bit of commentary about the lack of value in emerging markets. Criticisms that apply across industries -- from P&G to Facebook -- argue that companies that are banking their growth on their "next billion" consumers are entering a not-so-lucrative space.

Before the Twitter IPO last month, many argued that there was little value in 77% of the company's users living outside the United States.

When people think of the opportunity in "emerging markets," they often associate it with inexpensive, commoditized, low-margin products such as single-use shampoo packets or cheap brick phones.

To put it simply, this view argues emerging markets are not synonymous with high margins or profitability. In these markets, battles for market share that require hefty investment often only result in incremental product improvements that drive small gains in market share.

Given the challenges of localization, infrastructure and foreign regulation, then why is increasing investment in these markets the best decision a company can make?

More people with more income translate to higher consumption levels. Given these growth metrics, the world's largest companies, ranging from Apple to Yum! Brands, are placing huge bets in emerging markets.

What Facebook is doing

In the digital space, Facebook is making substantial efforts to acquire non-U.S. customers by subsidizing the cost of using Facebook on mobile phones and driving internet.org, an initiative committed to connecting two thirds of the world's population.

When Mark Zuckerberg announced the launch of internet.org, he stated: "The unfair economic reality is that those already on Facebook have way more money than the rest of the world combined, so it may not actually be proﬁtable for us to serve the next few billion people for a very long time, if ever."

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This statement is telling, especially if one looks at Facebook's average revenue per user (ARPU) stats across regions. Rapid acquisition of users in emerging markets tipped Facebook's user count to more than 1 billion, but the revenue from these users pales in comparison to those in the U.S.

In 2012, the average Facebook user from Asia-Pacific and a category dubbed "Rest of World" generated $2.35 and $1.84 in revenue respectively. Compared with the $13.58 for an average North American user, the opportunity in non-Western markets appears to be quite meager.

It begs the question: Given the lack of revenue generated by emerging market consumers, why are they worth acquiring now? Why not wait until they become more valuable?

Why the hype?

Simplistic extrapolations of Facebook's ARPU and user growth tell a radically different story about value. Even in a modest case scenario using 2012's annual growth rates show that more than half of Facebook's revenue will come from non-Western markets by the second quarter of 2017.

More realistically, with the strength of Facebook's mobile advertising strategy coupled with an increase in ad dollars and rates in emerging markets, that day will come much quicker than projected.

These trends, combined with the rapid rise in connectivity among the "next billion," leave little room for dispute about the value of users living outside of the United States and Europe.

Discovering value today

Focus on emerging markets isn't just about placing a bet on the distant future. In the technology industry, several companies have already had extraordinary success monetizing emerging market users.

Line, an Asian instant messaging client with 300 million registered users, generates its primary revenue stream selling digital "stickers" that their users can include in conversations. They are reported to be generating revenue at an annualized rate of $1 billion a year.

Line is not unique.

KakaoTalk, a South Korean instant messaging client, is running at a $600 million revenue rate with 100 million users. TenCent's WeChat has 300 million (primarily Chinese) users, $7 billion in 2012 revenue and is valued at approximately $100 billion.

Separate initiatives for developing economies, such as internet.org or Facebook Zero, will become less common in the coming years as connectivity increases. From social or commerce technology, many of our daily Internet experiences will be molded for the Indonesian or South African consumer before reaching the U.S. customer.

Given Facebook's growth in mobile over the past year, the social network will look very different in 2015 than it does today. And it will be users in cities such as Bangalore, India, rather than New York, who will influence the majority of these changes.

Pursuit of growth in countries such as India, Nigeria and Indonesia by technology companies is not based on a charitable stance that these consumers deserve to be connected.

Over the next few years, annual consumption in emerging markets will increase to about $20 trillion, which is double the current amount spent in the United States.

The value of emerging market consumers exists today, and for many businesses, it will multiply in the next 24 months. Companies need to act quickly to capture this opportunity by 2015, not 2050.